Businesses that sell on open account terms don’t get paid immediately; they offer a period of credit to the buyer. This credit period will be agreed between the parties and is often 30 or 60 days. Which means that they have to fund all their materials, time and people until they get paid.
One of the ways to access working capital finance is factoring. A factor or receivables finance provider buys the seller’s invoices and provides immediate payment of part or all the value.
Usually, the seller agrees that the factor controls all the outstanding invoices (sales ledger management) and collects the outstanding debt from the buyer. Once paid by the buyer, the factor passes on any remaining balance to the seller.
Depending on the needs of the seller, additional services such as credit information and credit default insurance cover can be provided. The usual practice is for the factor and the seller to agree between them what elements will be combined to create an overall package.
In this way, a seller receives a bespoke package of services and finance, whilst the factor obtains a secure source of business.
And because the relationship is a close one, the user will normally receive a greater level of funding than from a traditional source, and the factor will be more secure than a traditional lender. A real win: win in finance!
The descriptions of the products and the particular combinations of services vary from country to country depending on legal and regulatory environments, but they all revolve around the idea that the factor will provide working capital and ledger management support to the seller.
If a business sells on open account credit terms, offers goods and services which are easy to define and measure, then it’s likely that factoring can work for them.